Technology, Markets, & Global Finance by Paul Barsch

Black Swans Causing a Rethink on Global Supply Chains?

A fair percentage of academicians and corporate supply chain experts agree that running supply chains “lean and mean” with just in time processes is the optimum approach. However, Black Swans (low probability events with high impact) such as the March 11, 2011 Sendai earthquake and subsequent tsunami have companies rethinking how they source to deliver the products and services critical to success.

The 8.9 magnitude earthquake and tsunami that ravaged Japan’s coast and cascading Fukushima nuclear calamity have severely tested the links in today’s global supply chains. And while it’s true that some Japanese electronics and automobile manufacturers continue to struggle with factory shutdowns, most global supply chains weathered the storm quite well. However as supply chains arguably become more complex, executives should reconsider how man-made and natural disasters can affect processes in delivering goods and services to market.

A Financial Times article titled “Industry Left High and Dry” cites how some companies were not prepared for the repercussions of Japanese factory slowdowns or shutdowns. These enterprises relied too much on Japanese factories to produce critical electronic components, and others simply lacked contingency disaster planning. Even more disturbing, Barry Tarnef, a risk manager at US insurance group Chubb says; “Many manufacturers (lacked) the information needed to mobilize alternative arrangements quickly (when their supply chains were interrupted).

One of the themes that I have highlighted over the past 2-3 years is with the global integration of trade, capital, information and labor over the past decade; few people understand that our world is more tightly connected than ever before. In a highly inter-dependent environment, small mistakes can have large ramifications. And even larger events – such as tsunami, volcanic ash and the like can cause an earnings miss or worse depending on the severity and criticality of the event.

That’s why companies are starting to re-consider their global supply chain processes. This means structuring alternative supply networks, adding regional suppliers (instead of relying solely on one country), and doing a better job of setting up an IT infrastructure capable of linking suppliers and providing supply chain visibility from “field to fork”.

Black Swan author Nassim Taleb has long counseled companies to consider concepts of robustness and redundancy to build flexibility in response to adverse events. However, these considerations surely add additional costs, and many companies from retailers to manufacturers are already relying on paper thin margins.

One thing is for certain, there are no excuses for ignorance of how your supply chain processes work – or don’t work. The supply chain that weathers today’s storm may be wholly inadequate for tomorrows.

Question:

* For supply chains, should companies continue to “go lean” or build in redundancy? What are your thoughts?